<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10595
SFP PIPELINE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3713699
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
301 NUGGET AVENUE
SPARKS, NEVADA 89431
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(702) 358-6971
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES [X] NO [_]
NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ($0.01 PAR VALUE)
AS OF MAY 13, 1997: 1,000.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT PERMITTED BY GENERAL INSTRUCTION H.
================================================================================
<PAGE>
SFP PIPELINE HOLDINGS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 1997 and December 31, 1996...... 1
Consolidated Statement of Operations for the three-month periods
ended March 31, 1997 and 1996......................................... 2
Consolidated Statement of Cash Flows for the three-month periods
ended March 31, 1997 and 1996......................................... 3
Notes to Consolidated Financial Statements.............................. 4
Item 2. Management's Narrative Analysis of the Results of Operations...... 5
Financial Information of Santa Fe Pacific Pipeline Partners, L.P........... *
Financial Information of Burlington Northern Santa Fe Corporation.......... **
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 6
Item 6. Exhibits and Reports on Form 8-K.................................. 6
Signature.................................................................. 7
</TABLE>
* Incorporated by reference from Part I of the Form 10-Q of Santa Fe Pacific
Pipeline Partners, L.P. for the quarter ended March 31, 1997 (Commission
File Number 1-10066)
** Incorporated by reference from Part I of the Form 10-Q of Burlington
Northern Santa Fe Corporation for the quarter ended March 31, 1997
(Commission File Number 1-11535)
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................. $ 4,656 $ 3,061
Interest receivable........................ 1,021 1,047
Other current assets....................... 501 295
-------- --------
Total current assets..................... 6,178 4,403
Investment in Santa Fe Pacific Pipeline
Partners, L.P............................... 57,776 59,984
Notes receivable from Burlington Northern
Santa Fe Corporation........................ 130,000 130,000
Debt issuance costs, net..................... 6,476 6,597
Other assets................................. 2,812 2,701
-------- --------
Total assets............................. $203,242 $203,685
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Interest payable........................... $ 6,111 $ 6,111
Income taxes currently payable............. 28 848
Other current liabilities.................. 6,907 4,981
-------- --------
Total current liabilities................ 13,046 11,940
Long-term debt, net of unamortized discount.. 204,314 204,173
Deferred income taxes........................ 58,016 58,042
Other liabilities............................ 1,993 1,960
-------- --------
Total liabilities........................ 277,369 276,115
-------- --------
Commitments and contingencies (Notes (e)
and (f)).................................... -- --
-------- --------
Stockholder's deficit
Common stock............................... 1 1
Additional paid-in capital................. (33,388) (33,388)
Accumulated deficit........................ (40,740) (39,043)
-------- --------
Total stockholder's deficit.............. (74,127) (72,430)
-------- --------
Total liabilities and stockholder's
deficit................................. $203,242 $203,685
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-1-
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months
ended March 31,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Equity in income of Santa Fe Pacific Pipeline
Partners, L.P....................................... $ 4,894 $ 7,385
General and administrative expenses and other,
net of reimbursements............................... 126 168
-------- --------
Operating income..................................... 4,768 7,217
Interest income...................................... 2,119 2,198
Interest expense..................................... 6,376 6,364
-------- --------
Income before income taxes........................... 511 3,051
Income taxes......................................... 208 1,243
-------- --------
Net income........................................... 303 1,808
Accumulated deficit
Beginning of period................................ (39,043) (36,486)
Cash dividends..................................... (2,000) --
-------- --------
End of period...................................... $(40,740) $(34,678)
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-2-
<PAGE>
SFP PIPELINE HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months
ended March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 303 $ 1,808
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities --
Equity in undistributed earnings of Santa Fe
Pacific Pipeline Partners, L.P.................... 2,208 (283)
Deferred income taxes.............................. (26) (157)
Amortization of debt issuance costs and original
issue discount.................................... 262 250
Changes in:
Current assets................................... (180) (10)
Current liabilities.............................. 1,106 501
Other assets and other liabilities............... (78) (127)
------- -------
Total adjustments.............................. 3,292 174
------- -------
Net cash provided by operating activities...... 3,595 1,982
Cash flows from investing activities.................... -- --
Cash flows from financing activities:
Cash dividends........................................ (2,000) --
------- -------
Increase in cash and cash equivalents................... 1,595 1,982
Cash and cash equivalents --
Beginning of period................................... 3,061 7,890
------- -------
End of period......................................... $ 4,656 $ 9,872
======= =======
Income taxes paid....................................... $ 1,055 $ --
======= =======
Interest paid........................................... $ 6,111 $ 6,111
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
SFP PIPELINE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) The accompanying consolidated financial statements include the accounts of
SFP Pipeline Holdings, Inc. ("Holdings") and its wholly owned subsidiary, Santa
Fe Pacific Pipelines, Inc. ("SFPPI") (collectively, the "Company"). Holdings is
a wholly owned subsidiary of Santa Fe Pacific Corporation ("Santa Fe").
Subsequent to a business combination in September 1995, Santa Fe is a wholly
owned subsidiary of Burlington Northern Santa Fe Corporation ("BNSF"). The
accompanying consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements and notes thereto included
in its Annual Report on Form 10-K for the year ended December 31, 1996. In the
opinion of Company management, all adjustments necessary for a fair presentation
of the results of operations for the periods presented have been included in
these consolidated financial statements. Unless otherwise noted, all such
adjustments are of a normal recurring nature. The results of operations for any
interim period are not necessarily indicative of the results of operations to be
expected for the entire year.
(b) SFPPI received distributions aggregating $7,102,000 during both the three-
month periods ended March 31, 1997 and 1996, by virtue of its general and
limited partner interests in Santa Fe Pacific Pipeline Partners, L.P. (the
"Partnership"). In April 1997, the Partnership declared first quarter 1997
distributions on SFPPI's general and limited partner interests aggregating
$7,102,000, payable in May 1997. Financial information with respect to the
Partnership is incorporated herein by reference from Part I of the Partnership's
Form 10-Q for the quarter ended March 31, 1997.
(c) The notes receivable from Burlington Northern Santa Fe Corporation ("BNSF")
are due and payable upon the maturity of the Company's Variable Rate
Exchangeable Debentures (the "Debentures"), but are payable at any time prior to
that date to the extent, and only to the extent, that Holdings' board of
directors determines in good faith that payment is needed, after taking into
account all other available funds, for Holdings to meet its obligations with
respect to the Debentures. BNSF assumed the obligations associated with these
notes from Santa Fe in January 1997. Financial information with respect to BNSF
is incorporated herein by reference from BNSF's Form 10-Q for the quarter ended
March 31, 1997.
(d) The Debentures bear interest at a variable rate, payable quarterly in
arrears. Interest expense for each quarter is generally recorded in an amount
equal to the aggregate amount of distributions declared by the Partnership for
that quarter on the 8,148,130 common units for which the Debentures would be
exchangeable. The Partnership declared cash distributions of $0.75 per unit for
the first quarter of 1997, and, accordingly, the Company accrued interest
expense of $6,111,000 for the three months ended March 31, 1997. Interest
expense reflected in the consolidated statement of operations also includes
amortization of the original issue discount and debt issuance costs for the
Debentures.
(e) As discussed in Note 5 to the Company's consolidated financial statements
for the year ended December 31, 1996, certain of the Partnership's shippers have
filed civil suits and initiated Federal Energy Regulatory Commission ("FERC")
complaint proceedings against the Partnership, and the Partnership has
established reserves for costs related to the resolution of these matters. With
respect to the remaining civil action, brought by El Paso Refinery, L.P. ("El
Paso") and its general partner, on February 25, 1997, the Partnership entered
into an agreement with the El Paso bankruptcy trustee which, subject to the
approval of the bankruptcy court, would settle all of the claims raised by El
Paso and its
-4-
<PAGE>
general partner in the civil litigation in exchange for the payment of $16
million by the Partnership in two equal installments. As the amount of the
proposed settlement exceeds the amount that had previously been reserved by the
Partnership for this matter, the Partnership recorded a provision of $6 million
to reflect this settlement during the first quarter of 1997.
As additional information becomes available, it may be necessary for the
Partnership to record additional charges to earnings to maintain its litigation
reserves at a level deemed adequate at that time, and the costs associated with
the ultimate resolution of these matters could have a material adverse effect on
the Partnership's results of operations, financial condition, liquidity and
ability to maintain its quarterly cash distribution at the current level. The
discussion of these matters appearing at Note (d) to the Partnership's
consolidated financial statements for the quarter ended March 31, 1997 is
incorporated herein by reference from the Partnership's Form 10-Q for that
quarter.
(f) As discussed in Note 5 to the Company's consolidated financial statements
for the year ended December 31, 1996, the Partnership's transportation and
terminal operations are subject to extensive regulation under federal, state and
local environmental laws concerning, among other things, the generation,
handling, transportation and disposal of hazardous materials and, the
Partnership is, from time to time, subject to environmental cleanup and
enforcement actions. The discussion of environmental matters appearing at Note
(e) to the Partnership's consolidated financial statements for the quarter ended
March 31, 1997 is incorporated herein by reference from the Partnership's Form
10-Q for that quarter.
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS
OF THE RESULTS OF OPERATIONS
As the principal assets of the Company are its investment in the Partnership and
its notes receivable from BNSF, the following analysis should be read in
conjunction with the Part I financial information filed by the Partnership and
BNSF in their respective Quarterly Reports on Form 10-Q for the quarter ended
March 31, 1997, both of which are incorporated herein by reference.
For the three months ended March 31, 1997, the Company's equity in income of the
Partnership of $4.9 million was $2.5 million, or 34% lower than in the 1996
period. The Partnership's results of operations included a provision for
litigation costs of $6.0 million recorded in the current year quarter. Excluding
this provision, the Partnership's adjusted net income for the three months ended
March 31, 1997 was $16.0 million compared to net income of $15.4 million in the
1996 period. Total revenues of $56.1 million were $0.5 million, or 1%, lower
than in the prior year period, primarily due to a decrease in total volumes
transported. Partnership operating expenses of $37.4 million were $5.5 million
higher than in the first three months of 1996. Excluding the provision described
above, operating expenses would have been $31.4 million, 2% lower than the prior
year quarter, with higher field operating expenses being offset by lower
facilities costs, general and administrative expenses and power costs. The
Partnership's other income, net increased by $0.4 million as compared with the
1996 period primarily due to interest income received from property tax
settlements.
The Company's interest income is earned on its notes receivable from BNSF
bearing interest at rates tied to the Federal Funds rate. Interest expense is
accrued based on the quarterly distribution paid on the 8,148,130 Partnership
units for which the Company's Debentures are, under certain specified
conditions, exchangeable.
-5-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to the discussion of the current status of certain litigation
appearing at "Part II, Item 1. Legal Proceedings" in the Partnership's Form 10-Q
for the quarter ended March 31, 1997, which is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as a part of this report:
Exhibit 13.1 Form 10-Q of Santa Fe Pacific Pipeline Partners, L.P. for
the quarter ended March 31, 1997.
Exhibit 13.2 Form 10-Q of Burlington Northern Santa Fe Corporation for
the quarter ended March 31, 1997 to be filed by amendment.
Exhibit 27 Financial Data Schedule as of and for the three months ended
March 31, 1997.
(b) Reports on Form 8-K filed during the quarter ended March 31, 1997: None.
-6-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SFP PIPELINE HOLDINGS, INC.
(Registrant)
Date: May 13, 1997 By: /s/ BARRY R. PEARL
-----------------------------------------
Barry R. Pearl
Senior Vice President, Treasurer
and Chief Financial Officer
(On behalf of the Registrant)
-7-
<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10066
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4191066
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
1100 TOWN & COUNTRY ROAD
ORANGE, CALIFORNIA 92868
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(714) 560-4400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES [X] NO [_]
================================================================================
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet at March 31, 1997 and December 31, 1996.... 1
Consolidated Statement of Income for the three-month periods ended
March 31, 1997 and 1996.............................................. 2
Consolidated Statement of Cash Flows for the three-month periods ended
March 31, 1997 and 1996.............................................. 3
Notes to Consolidated Financial Statements............................ 4
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations.................................. 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 7
Item 6. Exhibits and Reports on Form 8-K................................ 8
Signature................................................................ 8
</TABLE>
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Current assets
Cash and cash equivalents............................ $ 45,845 $ 42,122
Accounts receivable, net............................. 36,806 33,563
Other current assets................................. 6,791 2,224
-------- --------
Total current assets............................... 89,442 77,909
-------- --------
Properties, plant and equipment........................ 737,837 738,395
Less accumulated depreciation........................ 111,163 109,701
-------- --------
Net properties, plant and equipment................ 626,674 628,694
Other assets........................................... 19,494 19,215
-------- --------
Total assets....................................... $735,610 $725,818
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable..................................... $ 2,543 $ 3,212
Accrued liabilities.................................. 50,049 32,333
-------- --------
Total current liabilities.......................... 52,592 35,545
Long-term debt......................................... 355,000 355,000
Other long-term liabilities............................ 68,869 71,351
-------- --------
Total liabilities.................................. 476,461 461,896
-------- --------
Minority interest...................................... 853 1,007
-------- --------
Commitments and contingencies (Notes (d) and (e))...... -- --
-------- --------
Partners' capital
General partner...................................... 853 1,007
Limited partners..................................... 257,443 261,908
-------- --------
Total partners' capital............................ 258,296 262,915
-------- --------
Total liabilities and partners' capital............ $735,610 $725,818
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-1-
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(In thousands, except per unit amounts)
<TABLE>
<CAPTION>
Three months
ended March 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Operating revenues
Trunk revenues........................................... $44,175 $44,519
Storage and terminaling revenues......................... 8,989 8,964
Other revenues........................................... 2,926 3,113
------- -------
Total operating revenues............................... 56,090 56,596
------- -------
Operating expenses
Field operating expenses................................. 10,683 9,190
General and administrative expenses...................... 6,339 6,915
Depreciation and amortization............................ 5,339 5,321
Facilities costs......................................... 4,592 5,830
Power costs.............................................. 4,480 4,674
Provision for litigation costs (Note (d))................ 6,000 --
------- -------
Total operating expenses............................... 37,433 31,930
------- -------
Operating income........................................... 18,657 24,666
Interest expense........................................... 8,834 9,082
Other income, net.......................................... 755 379
------- -------
Net income before minority interest........................ 10,578 15,963
Less minority interest in net income....................... (341) (515)
------- -------
Net income................................................. $10,237 $15,448
======= =======
Income per unit............................................ $ 0.52 $ 0.78
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
-2-
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three months
ended March 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 10,237 $ 15,448
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization....................... 5,339 5,321
Minority interest in net income..................... 341 515
Net additions to (payments against) environmental
and litigation reserves........................... 5,269 (5,057)
Other, net.......................................... 254 (1,421)
Changes, in:
Accounts receivable............................... (3,243) 155
Accounts payable and accrued liabilities.......... 9,047 9,564
Other current assets.............................. (4,567) (5,020)
-------- --------
Total adjustments............................... 12,440 4,057
-------- --------
Net cash provided by operating activities....... 22,677 19,505
-------- --------
Cash flows from investing activities:
Capital expenditures.................................... (3,602) (9,531)
Cash flows from financing activities:
Cash distributions...................................... (15,352) (15,352)
-------- --------
Increase (decrease) in cash and cash equivalents.......... 3,723 (5,378)
Cash and cash equivalents--
Beginning of year....................................... 42,122 41,219
-------- --------
End of year............................................. $ 45,845 $ 35,841
======== ========
Interest paid............................................. $ 770 $ 447
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-3-
<PAGE>
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) The accompanying consolidated financial statements should be read in
conjunction with the Annual Report on Form 10-K of Santa Fe Pacific Pipeline
Partners, L.P. (the "Partnership") for the year ended December 31, 1996. In the
opinion of Partnership management, all adjustments necessary for a fair
presentation of the results of operations for the periods presented have been
included in these consolidated financial statements. Unless otherwise noted, all
such adjustments are of a normal recurring nature. The results of operations for
any interim period are not necessarily indicative of the results of operations
to be expected for the entire year.
(b) Income per unit is computed based upon consolidated net income of the
Partnership less an allocation of income to the General Partner in accordance
with the partnership agreement, and is based upon the 19,148,148 units
outstanding. The quarterly allocation of income to the General Partner, which
was 3.23% of net income before minority interest for the three-month periods
ended March 31, 1997 and 1996, respectively, is based on its percentage of cash
distributions from available cash at the end of each quarter.
(c) On April 10, 1997, the Partnership declared a cash distribution of $0.75 per
unit for the first quarter of 1997, to be paid on May 15, 1997 to unitholders of
record on April 30, 1997.
(d) As discussed in Note 4 to the Partnership's consolidated financial
statements for the year ended December 31, 1996, certain of the Partnership's
shippers have filed civil suits and initiated Federal Energy Regulatory
Commission ("FERC") complaint proceedings alleging, among other things, that the
shippers were damaged by the Partnership's failure to fulfill alleged promises
to expand the East Line's capacity between El Paso, Texas and Phoenix, Arizona
to meet shipper demand. The FERC proceedings involve claims, among other things,
that certain of the Partnership's rates and charges on its East and West Lines
are excessive. To date, the complainants have filed testimony seeking
reparations for shipments between 1990 and 1994 aggregating approximately $35
million, as well as rate reductions of between 30% and 40% for shipments in 1995
and thereafter.
The remaining civil action, brought by El Paso Refinery, L.P. ("El Paso") and
its general partner, claims unspecified actual damages, which appear to include
the $190 million cost of a refinery expansion completed in 1992, plus punitive
and consequential damages. On February 25, 1997, the Partnership entered into an
agreement with the El Paso bankruptcy trustee which, subject to the approval of
the bankruptcy court, would settle all of the claims raised by El Paso and its
general partner in the civil litigation in exchange for the payment of $16
million by the Partnership in two equal installments. As the amount of the
proposed settlement exceeds the amount that had previously been reserved for
this matter, the Partnership has recorded a provision of $6 million to reflect
this settlement during the first quarter of 1997.
-4-
<PAGE>
While the Partnership believes it has meritorious defenses in these matters, the
complainants and plaintiffs are seeking amounts that, in the aggregate,
substantially exceed the Partnership's reserves and, because of the
uncertainties associated with litigation and FERC rate-making methodology,
management cannot predict with certainty the ultimate outcome of these matters.
As additional information becomes available, it may be necessary for the
Partnership to record additional charges to earnings to maintain its reserves at
a level deemed adequate at that time, and the costs associated with the ultimate
resolution of these matters could have a material adverse effect on the
Partnership's results of operations, financial condition, liquidity and or
ability to maintain its quarterly cash distribution at the current level.
(e) As discussed in Note 4 to the Partnership's consolidated financial
statements for the year ended December 31, 1996, the Partnership's
transportation and terminal operations are subject to extensive regulation under
federal, state and local environmental laws concerning, among other things, the
generation, handling, transportation and disposal of hazardous materials, and
the Partnership is, from time to time, subject to environmental cleanup and
enforcement actions.
The Partnership's accompanying balance sheet includes reserves for environmental
costs that relate to existing conditions caused by past operations. Estimates of
the Partnership's ultimate liabilities associated with environmental costs are
particularly difficult to make with certainty due to the number of variables
involved, including the early stage of investigation at certain sites, the
lengthy time frames required to complete remediation at most locations, the
number of parties involved, the number of remediation alternatives available,
the uncertainty of potential recoveries from third parties and the evolving
nature of environmental laws and regulations.
Based on the information presently available, it is the opinion of management
that the Partnership's environmental costs, to the extent they exceed recorded
liabilities, will not have a material adverse effect on the Partnership's
financial condition; nevertheless, it is possible that the Partnership's results
of operations in particular quarterly or annual periods could be materially
affected as additional information becomes available.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended March 31, 1997 Compared to 1996 Period
The Partnership reported net income for the three months ended March 31, 1997 of
$10.2 million, compared to net income of $15.4 million in the 1996 quarter, with
the variance being primarily due to a $6.0 million provision for litigation
costs recorded during the current year quarter. Excluding the provision,
adjusted net income for the three months ended March 31, 1997 was $16.0 million.
Revenues for the first quarter of 1997 of $56.1 million were $0.5 million, or
1%, below the corresponding 1996 quarter's level. Trunk revenues were $0.3
million lower than in the 1996 period due to lower volumes. Total volumes
transported decreased 1% compared to the 1996 period. Commercial volumes were
essentially even with the 1996 quarter due to lower demand in Northern
California and Nevada resulting from adverse weather conditions and a product
release which caused the Partnership's pipeline serving Reno, Nevada to be out
of service for one week. In addition,
-5-
<PAGE>
movements to Arizona were below expectations due to the reduction in gasoline
inventories in anticipation of gasoline specification changes during the second
quarter. Military volumes were 22% below the 1996 quarter due primarily due to
curtailed activity related to the weather.
Operating expenses of $37.4 million were $5.5 million higher than in the 1996
quarter, due largely to the provision for litigation costs. Excluding the
provision, operating expenses would have been $0.5 million, or 2% lower than the
prior year quarter, with higher field operating expenses ($1.5 million) being
offset by lower facilities costs ($1.2 million), general and administrative
expenses ($0.6 million) and power costs ($0.2 million). The increase in field
operating expenses is primarily attributable to higher environmental costs,
partially offset by reductions in certain other field costs. Facilities costs
decreased due primarily to favorable property tax settlements. General and
administrative expenses decreased largely due to lower outside legal costs and
employee benefit costs. The decrease in power costs is primarily due to lower
volumes.
Other income, net increased by $0.4 million compared to the 1996 period
primarily due to interest income received from property tax settlements.
Financial Condition
For the three months ended March 31 1997, cash and cash equivalents increased by
$3.7 million. Cash flow from operations before working capital changes totaled
$21.4 million for the three months, an increase of $6.6 million from the prior
year period due primarily to payment of settlement costs related to Sparks,
Nevada environmental litigation costs in 1996. Working capital cash requirements
increased by $3.5 million from the corresponding 1996 period. This increase is
primarily due to timing differences in the collection of trade and nontrade
receivables.
Significant uses of cash included cash distributions of $15.4 million and
capital expenditures of $3.6 million. Total capital expenditures for 1997 are
projected at approximately $28 million. Total cash and cash equivalents of $45.8
million at March 31, 1997 included $15.4 million for the first quarter 1997
distribution to be paid to unitholders in May 1997 and $9 million of accrued
interest on the First Mortgage Notes to be paid in June 1997.
Long-term debt aggregated $355 million at March 31, 1997 and consisted of $305
million of First Mortgage Notes (the "Notes") and a $50 million borrowing under
the Partnership's bank term credit facility. The Partnership intends to
refinance its Series D Notes, due December 15, 1997 in the amount of $28.5
million, and some or all of the remaining Notes as the various series become
payable. To facilitate such refinancing and provide for additional financial
flexibility, the Partnership has available the multi-year term credit facility,
which presently has a $60 million aggregate limit, and a $20 million working
capital facility, with three banks. The existing term facility is available for
refinancing portions of the Partnership's long-term debt and capital projects,
and may be utilized on a revolving basis through October 1998, at which time the
outstanding balance will be converted to a three-year amortizing loan.
Management has held discussions with the three lenders, and the lenders have
presented proposals, to significantly expand the Partnership's borrowing
capacity under, and extend the term of, the existing term credit facility. The
Board of Directors of the General Partner has approved such expansion and
extension of the facility's provisions. Management expects that such expansion
and extension of the facility's provisions will be completed by June 30, 1997.
-6-
<PAGE>
Other Matters
Reference is made to Notes (d) and (e) to the Partnership's notes to
consolidated financial statements, beginning on page 4 of this Report, and to
Part II, Item 1 of this Report, for discussions of the status of the FERC
proceedings, El Paso civil litigation and certain environmental matters.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 in the Partnership's 1996 Annual Report on Form 10-K
for background information on certain litigation.
FERC Proceedings
On March 28, 1997, in the Texaco Refining and Marketing, et al. vs. SFPP, L.P.
-----
proceeding (Docket No. OR96-2-000 et al.), the Administrative Law Judge issued
-----
an initial decision that the movements on the Partnership's pipelines upstream
of its Watson, California station origin point at issue in this proceeding are
not subject to FERC jurisdiction. The decision is subject to appeal to the full
Commission by the complainants.
East Line Civil Litigation
On February 25, 1997, the Partnership entered into an agreement with the El Paso
Refinery, L.P. ("El Paso") bankruptcy trustee which would settle all of the
claims raised by El Paso and its general partner, El Paso Refining, Inc.
("EPRI"), in the civil litigation brought by each party in exchange for the
payment of $16 million by the Partnership in two equal installments.
Consummation of the settlement is conditioned on approval by the bankruptcy
court under a final, non-appealable order. On April 21, 1997, the bankruptcy
court approved the settlement as to the interests of both El Paso and EPRI. On
April 25, 1997, EPRI filed a notice of appeal of the bankruptcy court's ruling.
California Public Utilities Commission Proceeding
A complaint was filed with the California Public Utilities Commission on April
7, 1997 entitled ARCO Products Company, Mobil Oil Corporation and Texaco
Refining and Marketing Inc. vs. SFPP, L.P. The complaint challenges rates
charged by the Partnership for transportation of refined petroleum products
through its pipeline system in the State of California and requests prospective
rate adjustments. The Partnership is scheduled to file an answer to the
complaint on May 15, 1997. Management believes the Partnership has substantial
defenses against the claims raised in the complaint and intends to litigate this
matter vigorously.
Other
With respect to the judicial reference proceeding to determine the rent payable
by the Partnership for the use of pipeline easements on rights-of-way held by
Southern Pacific Transportation Company ("SPTC"), the judge issued a Statement
of Decision and Judgment on May 7, 1997 that reaffirmed the conclusions set
forth in his January 1997 Statement of Tentative Decision. This Statement of
Decision and Judgment will be filed with the Superior Court for the County of
San Francisco, under which court's jurisdiction it is subject to appeal by SPTC.
-7-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) The following document is filed as part of this report:
Exhibit 27 Financial Data Schedule as of and for the three months ended
March 31, 1997.
(b) Reports on Form 8-K filed during the quarter ended March 31, 1997: None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SANTA FE PACIFIC PIPELINE PARTNERS, L.P.
(Registrant)
By: Santa Fe Pacific Pipelines, Inc.,
as General Partner
Date: May 13, 1997 By: /s/ BARRY R. PEARL
----------------------------------
Barry R. Pearl
Senior Vice President, Treasurer
and Chief Financial Officer
(On behalf of the Registrant)
-8-
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SFP PIPELINE HOLDINGS, INC. AS OF AND FOR
THE QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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